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88 Responses to “Overbought? Watch FOMC Announcement at 2:15”

The market certainly feels like it’s primed for a big move…up or down. I think we’re turning down, but the market keeps coming back although it really isn’t making any headway. 876 on the S+P looks like the make or break point for the market and we’ll know after the Fed announcement. It all comes down to whether or not they announce more QE.

Good to have Barry back from the land of publishing and improving the blog!

This market is not trading on news. It is trading on expectations. ie, everyone is somehow either going to pass the stress test or they will have fixed their problems by monday with new capital or accounting tricks or whatever. No one cares about the reality of that. ie, dilution of existing shares. Ie, the expectation is that all they really need to do is pass this test no matter how flawed we know it to be in order to be set for growth and profits. So, expectations is more of a dream state but that is not the point.

Same with today. The market seems to have bet ahead of Fed. So, they are expecting some more in the way of quantitative easing or what ever we are calling it this week. This probably means that unless the Fed really wows us the market will pull back. (first half hour after the announcement is to be ignored)

Yet, for once it is easy to know how to trade this. 876 is the mark give or take a dollar.
A clean close on good volume with the then subsequent retest in a couple of days means 920 or more.

I think it should be clear for all that the stress tests are a facade meant to appease [deceive] the public into a false sense of security. We should go into next week knowing that the stress tests will reveal some banks with some problems (they can’t just put out a clean bill of health because not even a mentally retarded person would believe it; otherwise they would) but these problems will not be so large as to inconvenience any of these institutions, i.e. they will be fixable problems that the government will not have to commit any new bailout money too (i.e. preferred conversion). None of these banks will be forced into bankruptcy or anything else drastic or potentially panic inducing. The stress test, for all intents and purposes, is meant as a confidence building tool (for unsophisticated investors) rather than a true hard line look at the state of the nation’s largest financial institutions. How you trade this is up to you, but know the government will go under before any of these damn banks do!

“Interesting that Jim Rogers says he doesn’t have any shorts on right now.”

If we ever see SPX 975-1000 again during this rally I would be short with maximum leverage with every penny I have plus whatever I could borrow. I just don’t feel that SPX 875 is that kind of level. If it was that critical, I think that the multiple H&S formations we have seen forming would already have led to a breakdown.

With all of the intervention, helicopter drops etc. I am happy to sit on the sidelines.
Market will be there tomorrow.

“One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It is simply too painful to acknowledge — even to ourselves — that we’ve been so credulous.” — Carl Sagan

Dr. Sagan, thank you, your voice from the cosmos is heard. The big bamboozle that we need to painfully acknowledge, if only to ourselves, is that somehow we have been duped into believing that our leaders know what they are doing. Perhaps we could kindly call this “hero worship,” but it is more accurately described as the tyranny of the experts. Our culture is infatuated with heroes, and blinded by the fact that our leaders claim to be experts, but that in reality know nothing and are consistently wrong.

Bill King echoes Sagan’s brilliance in his discussion of the soon to be released stress test of the country’s largest 19 financial institutions. “A major problem with the ‘stress test’ is it depends on modeling and it’s the precise practice responsible for much of this economic and financial mess. It’s extraordinary that so many people believe that the Fed and Treasury, after missing the financial disaster, housing debacle, recession and derivative implosion, can now extrapolate economic conditions and resultant financial affects from its models. How did all that rocket-science modeling for subprime defaults and securitization workout? Yet many people already forget or ignore this reality.” They don’t know what their doing with these models, they don’t represent the real world, but they are going to go by them and pretend that they’re not WRONG.

So, who are these tyrants, and why do we listen to them at all? Why do they have so much power when they are consistently wrong? Its because we citizens, the body politic, fail to call them out when they are categorically, unqualifiedly, and are consistently wrong. The list of tyrannical experts is innumerable so we will direct our attention on Ben Bernanke, Timothy Geithner, and Hank Paulson.

Still think reaction to FED will be painful up move before going down. Could be wrong, but there is just too much risk to short here. With these low volume levels, it won’t take much selling to drive the market down fast. And then of course, we get the uptick rule back as they blame the short sellers.

the financial system is broken. once again the goons in charge brought down the financial system with completely flawed models. the goons in charge have not changed their mindset. the goons in charge are trying to fix a model that is broken and not coming back. the economy or whatever we call it continues to be on lifesupport from a gov that has backstopped or guaranteed just about every aspect yes i do believe they are behind equities as well. the goons are crowding out private capital. private capital would never do some of the bond deals that have been guaranteed by the FDIC. i suspect a meltdown in CRE that no one can fathom just like they could not fathom the 2007 residential collapse. just another point….do you realize not one bad asset has been removed from a bank balance sheet and things continue to deteriorate. thank god for getting rid of mark to market. i suspect this is the eye of the hurricane and things will get substantially worse come end of summer.

@DL: No, no, no. Plunges involve minimal pain simply because they end almost as soon as they begin. Plus it would be too easy for shorts to make a killing. Crash, collect.

Bear markets don’t end that way, they grind relentlessly lower on day after day of low volume trading and end with the bulls whimpering into their pillows for their mommies and swearing solemnly that they will never ever buy a stock again. Finally the volume is so low that even the shorts cash out and leave the market to fester.

We’re not even close yet although Jan and Feb were a preview of the grinding to come.

hh is right, eye of the hurricane. The sun is out, flowers are blooming. Why be short???

I do expect, once the extreme volatility dies down, months and months of boring down days in the market. At least 6 down for every one up. Maybe for 18 months. Minus a half a percent here, minus a quarter percent there. The phrase “the market can’t go down every day” will seem to have been wrong. Eventually it will end, but look at Japan, really. We aren’t Japan, but this is a modern example of a large economy, and what can happen over the long term.

BTW – I’d like to short, I just think risk is too high here. Any rational person would be thinking about shorting this market. I’m just not gutsy enough to do it big, and I won’t “let it ride.” Tight stops only.

DL: The last bear only ended in 2003 because of the Fed, or you can argue that 2003-2007 was just a rally.
I am definitely thinking about the real big ugly brutal bears, like 1974, like Japan, like the 1930s.

I fully expect to be wrong… that way I’m happier when the trades work out, and dont get too pissed when they go against me.

Yeah… my philosophy is that trading is like going off to war because you think it’ll be an interesting and entertaining thing to do. In general I would advocate certain trades like I would advocate laying in the middle of the road for excitement – people have t0 make their own decisions about that.

I’ve always stated to everybody in my personal life that asks me about trading that I expect to ultimately lose everything in my trading account.

Also it’s foolish to follow somebody else and put on a trade – there’s no guarantee they’ll tell you when they take off the trade and that’s where the money is actually made! (Or preserved for that matter.)

Best bet based on risk/reward ratio at this moment is SRS. 3000 shares will make you a millionaire when the unraveling starts. I suspect that GS and friends will jump on it at the exact downturn moment to recover their REIT bets which are doomed. (Think conspiracy if you must)

I share the enthusiasm for SRS and if you miss the first 5-10% of the move there will be plenty more. If last year was the year of SKF, this will be the year of SRS.

You have to figure that there will be an infinite number of Hail Marys for the money center banks because of their deposits and their central role in the economy, but seriously, do you see the Congress approving bailouts for Vornado and Simon Property Group? Sorry.

No, this bull rally will end and nobody will notice for a while. Too many participants have a vested interest in sustaining their disbelief. They will play hot potato with each other in much the same way that idiots traded mortgage backed paper they knew wasn’t worth much. Just as the market fell in 11-07, this one will decline eventually.

I suspect a few suckers are bringing in new money, but not many are from the retail trade. Since most people in the markets are down significantly from 11-07, few are stupid enough to jump back in on the first little green shoot. Some professional money managers are stupid enough to jump in for any rationalization, and they are the new money. Optimistic shorts are the balance, all trying to catch a knife at the apex.

The market will deflate when nobody pays any more attention to it. This means earnings season will be over and the excess of buyers over sellers disappears.

DL, please note that a 10% fall in FAZ is only about 90 cents. If the market were to tank next week, the rise would certainly be greater than 10% due to the leveraged nature of the fund. It’s all mathy. At this level, tight stops should work well. A decent fall in the S&P would trigger a massive rise in FAZ, and thus I spoketh of my sure thing belief. So, the only way you can lose is if the market never falls again.

To back up your point, on Investor’s Business Daily, the relative strength rating is 1 right now for SRS, meaning 99% of equities have performed better than SRS. What the hell? That’s pretty much as detached to reality as I can think of. I’m seriously thinking of taking the plunge in, too…

“…do you see the Congress approving bailouts for Vornado and Simon Property Group?”

DL said: “Bernanke could buy up all the debt that is backed by their properties.”

Surely not. That would be the kind of thing that only happens in banana republics, where the Government exists only to serve the business interests of the ruling class. Hmm…… I guess you could be right.

Watch EEV for a surprise play if the next wave down comes. Got some SRS and MZZ too, but its getting to point that its a bit painful to add more. This rally can easily have a few explosive upside days before rolling over

On the other hand, banks are making most profits by trading now. Since they have the most money, they are now in the stock market bubble business, rather than the real estate bubble business or the mortgage backed paper bubble business or the oil bubble business.

In other words, this may be the beginning of the next big bubble and it has a long way to go before the next collapse. Just as oil made it to $147 due to a concocted demand cover story, this market may be on the way to higher highs based on new lies that everyone wants to believe. Hedgies have enough cash to sustain the fraud and be victimized by it. The big banks, I suspect, are the instigators in this one.

Obama and crew will likely be gullible enough to look the other way because of their foolish assumption that a rising market, for any reason, takes the heat off of them for a while. A rising market for the right reason — sustainable economic growth — is a great reason for a market to go up. A rising market due to the fact a deniable fraud can be performed is not a good reason for a market to go up.

I think Uncle Stupid is about to be snookered again and more personal savings will evaporate as a consequence in a few months, after the new stock market bubble collapses.

You better recheck the charts on SRS… looks like 2008 might have been the good year for SRS as well as SKF. no matter what happens this year, which is already 1Q over, i doubt SRS will see high 200s again. double or triple from the 20s is more likely.

Touche, Lefty. Must be that English wit I’ve heard so much about. The next time Mr Market takes a nosedive just after you’ve thrown all them sinks in, do remember to remind us of your brilliance. here’s rooting for ya.

Just as I railed about the oil ponzies a year ago, I think I’m going to pay close attention to the stock ponzies running the stock market today. A little undeserved stock market euphoria is a natural thing. When it continues and surges every time bad news is announced, then something else might be running the show. I think the trading techniques that caused oil to make it to $147 have been adapted and/or are being adapted to the stock market. This baby will go to S&P 1000 or more.

DL, you might be right about the market not going down. In an honest game, it would. I’m not sure the stock market is an honest game any more.

Hedgies and money managers will have to join in and add fuel to the fire. Logically, they have no alternative. They will be the suckers in this bubble, and their customers will be the victims in the wealth transfer from the funds to the bgig banks.

my indicators are showing srs is a crowded trade. Continued short squeeze is likely in CRE. The blowup in these scenarios is usually fast and furious, hard to predict, and hard to catch. Big volatility is expected even on the way down. Really scary to me to be long srs right now. Some are losing interest, but not too much give yet on my radar.

EWT up 13% today, a little irrational exuberance, perhaps? Likewise the FXI.
Still just watching for now.

“The next time Mr Market takes a nosedive just after you’ve thrown all them sinks in, do remember to remind us of your brilliance”

Not quite clear what your issue is, Bubba. My kitchen sinks would be on the short side. I have no need to remind anyone of my brilliance – although I did call the bottom at 666.79 within about ten minutes of the 3/6/09 low.

dead hoboOn the other hand, banks are making most profits by trading now. Since they have the most money, they are now in the stock market bubble business, rather than the real estate bubble business or the mortgage backed paper bubble business or the oil bubble business.

Makes the most sense of all the theories that have been chucked against the wall, thus far.
Get your big board out and
catch a wave, spring has sprung.

For me, buying gold has been a lot like sticking my hand into the disposal to dislodge whatever is messing it up.

Yes, that’s the disposal with the flaky power switch.

I find myself wondering, given the large fraction of money that is (justifiably) cowering in fear on the sidelines, where are the sales going to come from to create another plunge in the markets? The banksters using the bailout money to short their own shares? Goldman Sachs in the emperor’s booth at the market coliseum (a.k.a. the Circus Maximus), standing to give a thumb’s down to Mr Market?

I suppose it’s all relative, given the reduced trading volumes it doesn’t take much selling to drive things lower.

FOMC says they expect inflation to remained subdued. Really? Remember, this is brought to you by the same clowns who indicated that there was no impending mortgage crisis, then that it was contained and finally, that banks were all well capitalized. Fool me once, shame on you. Fool me twice, shame on me. Fool me thrice, everyone should begin to realize that nothing reported by this government is reality.

Thanks for the shout out. That was a nice trade for anyone that jumped on.

I’m still thinking it might be too early to go short. I have seen a lot of people discuss the higher levels of bulls, low put/call, etc which we should all expect but it’s not mania level to me. 59% bulls in the Barron’s survey isn’t the type of stuff I’d think I’d see during this rally, I think it should be higher, like 80-90% bulls. Plus, lots of big money names are still selling the rally.

I notice lots of the commenters on here that I follow, with the exception of Karen, have been very skeptical of the rally so I still think the direction is up.

Here is a thought:

My thinking is that this rally will end and stocks will peak right around the time you hear that the govt has done enough and they don’t need to do anything else. Investor confidence would be closer to the levels we saw back in October 2007, not today’s levels. It would be a feeling of we made it out of a terrible recession and look, things aren’t so bad anymore. Then I think another crash will come. I caught an early glimpse of this just this morning during the normal silly discussion on CNBC when crazy Karl made a comment along the lines of “maybe if that happens the government can get out of some of these programs it has set up” when a panelist was saying how a second half recovery could develop.

We still seem to be in the early stages of credit deflation (not regular deflation, there is a difference) and as long as that continues the larger trend is down. We can just have some awesome rallies in the meantime, I think this qualifies as one of those.

Another leap to celebrate the recovery and draw in some true believers?

Or a sucker dip to draw in some shorts?

You know, I’d love to put real cash into this market if I thought it were honest. Naked shorts aren’t honest on the down side. Well meaning govt support for phony market bubbles are even more insidious since they sucker innocents into putting cash into a market with false values. A few more percent like this and headlines such as “Obama Using Stock Ponzies To Pay For Socialism” will start to appear.

For me, the S&P 500 76 day moving average is currently a better gauge, but it still shows pretty overbought (1.67 times the standard deviation). Nasdaq composite 31 day moving average is 1.69, and NYSE composite 32 day is 1.87.

But, what I am buying is SRS, which is the most oversold Proshares ETF (-2.23 times the standard deviation from its 30 day moving average). We all remember from math that two standard deviations from the mean account for 95.45% of the sample. I buy 100 shares a day, but sell the whole lot whenever it is in the green to avoid getting my face ripped off as Denninger likes to say.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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